Some observations on the big issues of the world and the little things in life.

Monday, June 27, 2011

There Will Be Blood? Gas Shale and NG in general may not be all it's cracked up to be.

The New York Times continues its excellent "Drilling Down" series. The installment "Behind Veneer, Doubt on Future of Natural Gas" shows cracks in the idea that cleaner, cheaper and domestic natural gas will be the fossil fuel of the future (and implicitly the savior of our energy-intensive lifestyle):

But not everyone in the Energy Information Administration agrees. In scores of internal e-mails and documents, officials within the Energy Information Administration, or E.I.A., voice skepticism about the shale gas industry.

One official says the shale industry may be “set up for failure.” “It is quite likely that many of these companies will go bankrupt,” a senior adviser to the Energy Information Administration administrator predicts. Several officials echo concerns raised during previous bubbles, in housing and in technology stocks, for example, that ended in a bust.

With regards to the Marcellus Play shale gas, I am pretty agnostic about its potential. I've found that the estimates of recoverable reserves have risen with interest in the past decade and the boosters have stopped distinguishing between reserves and resources. Furthermore I have wondered about claims that fracking wells would have long production curves similar to conventional wells. Seems I am not the only one, as e-mails and other sources from insiders also reveal doubts:

“Money is pouring in” from investors even though shale gas is “inherently unprofitable,” an analyst from PNC Wealth Management, an investment company, wrote to a contractor in a February e-mail. “Reminds you of dot-coms.”

“The word in the world of independents is that the shale plays are just giant Ponzi schemes and the economics just do not work,” an analyst from IHS Drilling Data, an energy research company, wrote in an e-mail on Aug. 28, 2009.

The worst case scenario I envision for Pennsylvania is one where many never realize a profit from their leases, losses from the unprofitable wells are socialized, drillers skip out on cleanup costs due to lax oversight, and the state never collects much revenue from the profitable wells. Pennsylvanians overall lose out, those in the busted boom areas fall even more into a economically depressed condition, and the company officers and pols they own make out like bandits. This is what you get with a 19th century mindset.